First Quarter 2004 Review

The torrid pace of stock market gains enjoyed both in the U.S. and around the globe in 2003 cooled in the first quarter of 2004. For the first three months, the S&P 500 Average gained only a modest 1.29 %. Growth stocks generally were weak, but value stocks showed a little more strength. The S&P/Citigroup BMI (Broad Market Index) Global Composite, a fairly new index that reflects stock markets in all major world economies, lost 0.15 % in the month of March. In spite of that one month decline, the BMI Global tacked on an additional 4.16 % in the first three months. Japan had a strong showing in the first quarter, helping the Asia/Pacific BMI index to jump almost 10% in the quarter. But here at home, after a good run, many stocks took a breather following eleven straight months of gains that began in April, 2003. "Stocks don't grow to the sky," an old adage, sums up our present market. Investor concerns about the War on Terror, a slight rise in interest rates, possible future inflation and a desire to take some profits off the table all contributed to a rather flat to down quarter for American stocks.

We're again in the earnings season, those several weeks following the end of a calendar quarter when corporations report their results. A number of earnings announcements have been very good lately. Following years of streamlining operations and cutting costs, a significant number of American companies have announced healthy profits for the first three months of 2004. A good report card for the first marking period offers hope for another good year. I expect continued gains in productivity (more output per labor/hour), low or modest inflation, low interest rates, a low dollar, which helps our exporters compete in the world market, and growing demand for American know-how and our high-end finished products. Longer term, I'm in the optimists' camp. The U.S. Dept. of Commerce, supporting my hopeful outlook, reported that our economy grew at a rate of 4.2% in the January through March period. For the last nine months our economic growth rate has averaged 5.5%, the best three-quarter result in the last 20 years.

Significant gains in productivity have been contributing to higher profits, but lower payrolls. For many years, perhaps since the early years of office machines and computers, manufacturers have needed fewer workers to perform the tasks formerly done by a larger number of employees. Technological advances have improved efficiency in a great variety of workplaces, requiring smaller payrolls. This is good news for shareholders but bad news for terminated employees.

Frequent news stories about job layoffs, often attributed to outsourcing, have created a climate of insecurity among a number of U.S. workers. The media regularly run special reports on how lost jobs can crush a small town's economy.

Listening only to the bad news industry is a mistake. The bad news folks do not and perhaps cannot report on the big picture. It's too big. As a result of space and time limitations, we read, see and hear only a snippet of information, usually biased one way or another, which defines a real or apparent problem, plenty of criticism and almost no solutions. This trend is not new. It's been going on since the day someone invented gossip.

Jobs aren't lost only due to productivity gains. Jobs are also eliminated because of product obsolescence, business bankruptcies, foreign and domestic competition, tax incentives given or taken away as states vie for employers, and, of course, because of outsourcing. Public companies have obligations to the shareholders who are the owners as well as to their employees. In a perfect world, there would be lifetime job security. It's been tried in Europe and in the former Soviet Union. It didn't work. In the former Soviet "workers paradise" the glories of central planning were summed up with "You pretend to pay us. We pretend to work." What has worked since Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776 is the free market, where the laws of supply and demand determine the actions of individuals, markets and nations.

Productivity gains yield improved efficiency. Higher efficiency usually results in lower costs. Lower costs help propel profits ever higher. A machine requires capital for purchase and ongoing service, but it does not need a vacation, a pension or a health insurance plan. Company managers ask themselves: "Why hire workers if a machine can do the job cheaper?" This isn't new. Productivity gains have been advancing since the early years of the Industrial Revolution. How long will this trend continue? Should we all worry about our jobs? Carried to its logical, but absurd, conclusion, one might argue that all work will one day be done by machines and all humans will be unemployed. This will not likely happen any time soon because old jobs are replaced by new jobs. We'll still be working. The jobs will change to meet new needs.

The U.S. Labor Dept. quotes the latest unemployment rate for American workers at 5.7 %. This means that 94.3 % of us (among those who are counted) have jobs. And, no, we're not all flipping hamburgers. The current number of unemployed is not horrible, but appears weak compared to other recoveries. This job recovery is slow. The American economy gained a modest 308,000 new payroll jobs in March. While it is true we are losing jobs to workers in other countries, there are counterbalancing forces in our growing economy to offset these losses. Higher paid American jobs go overseas to low paid workers. The laid-off American worker can chose to retire, try to find another job similar to the one he or she lost or consider a new job. Adventuresome souls with some financing might open a small business. Some may work as consultants in their industry and might even work for the company that just let them go. Others will learn a new trade or business.

One of the fastest-growing industries in America is job training and re-education. These education companies retrain workers for the emerging labor needs of the newer industries. Several of these firms are publically traded. Free market entrepreneurs create new solutions for new problems.

There are two important government reports on employment. They are the Bureau of Labor Statistics 1) Household and 2) Payroll surveys. The website is www.bls.gov. There's much more detail available in any bona fide U.S. Agency website than the nightly news has time to discuss. The evidence reported by the BLS suggests a healthy economic recovery at present with enough strength to continue for at least as long as most prior recoveries.

It's easy to forget how much progress has been made in the last few moments on the human history time clock. In the 17th and 18th centuries America's economy was primarily agricultural. In the 19th century America turned to manufacturing. In the 20th and now the 21st century we were and are in an information age economy. Steam replaced human and animal labor. Hydrocarbon combustion-based energy fueled the industrialization of the country and supplied a hungry world market with mass-produced products. We have now moved to providing service and managing information. During the last 300 years almost every American who wanted a job could find one most of the time. Productivity gains allowed fewer workers to do more. The demand for newer products and services has kept the work force busy. History reports an American economy that has been robust. Several national depressions, often called panics during the 19th century, were the exceptions, not the rule.

We should be aware that the government's unemployment numbers reflect only certain payroll and reported household jobs. There may be millions of people in America today who do not report their earnings on a company payroll. They pay no taxes. They're not tracked because they have no Social Security numbers. They're part of the "underground" economy. And, with few exceptions, they're probably working one or two jobs "under the table."

We are clearly in a global economy. Jobs, material and capital flow from country to country every day. Japanese companies build cars in America. We buy oil from OPEC countries and consumer goods from everywhere. The international work place is changing rapidly. When I was in college, a computer was a huge machine that used punch cards (oblong stiff cardboard cards with many small rectangular holes punched in them, for those of you too young to know about such things). We can't predict the number or type of jobs the future will require. Those of our children who are now under age 25 may have 4 or 5 different careers during their working years as the economy evolves. Because the rate of change is increasing, it's tough to look into the future with certainty. Everything's the same. It's always changing. Today I called one of the companies which provides us with office machines. The service person I spoke to was sitting in an office in the Philippines. (I asked.) I was immediately connected to a serviceman in my area who came to the office to make the repair. Welcome to the global market place.

It's interesting to note that China is losing jobs to other Asia/Pacific labor markets where costs are lower than in China. Regardless of where the job goes, the income received by the foreign worker who gets the job may exceed the income otherwise available to employees in that country. This newly more profitably employed worker becomes more prosperous. As prosperity spreads throughout the world to more and more worker/consumers, there is an eventual demand for a higher standard of living, more goods, cleaner water and air, purer food and more opportunity in each developing nation. The formerly "backward" country starts to look more like the countries whose economies are more established and mature. Of course this also creates pressures, as in Brazil and elsewhere, on the natural environment. I'd refer you to the National Geographic Society and their long-running magazine for stories of failures and successes in the preservation of our natural world in the face of this globalization.

In the last century the world's standard of living increased dramatically. Peace, prosperity and quality of life are goals shared by all but a small number of fanatics in this world. The entire globe is slowly embracing the free market model with all its complexity, turmoil and hope for a better tomorrow. Historians, looking back at our time fifty years from now will, I hope, report on our having made great strides forward in all aspects of human needs, despite selfishness, greed, hatreds and war.

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